June 1 (Reuters) - Britain threatened to introduce tougher regulation for pre-paid funerals on Friday, saying it believed some providers were not treating grieving families fairly, an announcement that sent shares in funeral services company Dignity Plc down sharply.

The government said the $2.65 billion industry’s self-regulatory framework may not be adequate, adding that it was “appalled” by some sales practices. It would consider asking the Financial Conduct Authority to oversee the sector.

Dignity and Co-op Funeralcare - part of mutually-owned Co-Operative Group - dominate the market in Britain. Their offers include pre-paid funeral plans that let customers pay for a funeral at the market price at the time of agreement.

Britain’s Competition and Markets Authority, conducting a separate investigation into the sector, said the average cost of a funeral was nearly 3,800 pounds ($5,051) in 2017, with those on the lowest incomes potentially spending up to one third of their annual income on a funeral.

Extra costs pile up to another 2,000 pounds, leaving many people concerned about taking on debt.

The CMA said it would investigate whether the information provided by funeral directors on prices and services was clear enough for people to be able to choose the best option. It will also look at how prices have changed. (bit.ly/2HbySaP)

The rising level of cremation fees will be considered as part of the review, with cremations now estimated to account for around 75 percent of all funerals, the regulator added.

Shares of Dignity, Britain’s largest listed funeral service provider, fell as much as 14 percent, setting them on course for their worst day since the company said in January it would cut prices for some of its services.

Both Dignity and The Co-operative Group welcomed the news and said they had both previously called for more transparency.

“As part of our support for these reviews, we expect to share the work we have already collated to support the calls for regulation we have been making for some time,” Dignity’s CEO Mike McCollum said.

Brokerage Peel Hunt, however, said the review came at a bad time for Dignity, as it trials new price models.

“The outcome may just be greater visibility on pricing, but this will be unhelpful for Dignity given its current premium pricing,” it said, keeping a “hold” rating on the stock.

The Co-operative group said it has introduced new products and initiatives to help tackle funeral affordability.

Demand for funeral plans has grown significantly in recent years, with annual sales more than tripling between 2006 and 2017, the government said.

“I’m appalled by the lengths that some dishonest salesmen have gone to in order to sell a funeral plan,” said John Glen, economic secretary to the Treasury.

“There are thousands of pre-paid funeral plans bought each year, and most providers are fair and legitimate. But tougher regulation will ensure robust standards are enforced for all plan providers, and protect individuals and their families if things go wrong.”

The announcement echoes moves by the government to clamp down on anti-competitive pricing in the domestic energy market and also in the provision of high-cost loans, in a bid to protect consumers at a time of low wage growth and rising costs.